Tax Benefits for Education

Tax Benefits for Education

American Opportunity Tax Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for a tax credit, the American Opportunity Tax Credit, to pay for college expenses.

The American Opportunity Tax Credit originally modified the existing Hope credit making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels.

If you have questions about the American Opportunity Tax Credit, these questions and answers below might help. For more information, see American Opportunity Tax Credit.

What Is It?

Tax credits are subtracted directly from the tax a family owes when filing their IRS 1040.

The exact amount of the credit depends on a family's income, the amount of qualified tuition and fees paid, and the amount of certain scholarships and allowances subtracted from tuition. The total credit is also based on how many eligible dependents are in the family, rather than a maximum dollar amount for the family.

Who Qualifies?

The Taxpayer: An eligible taxpayer must file a federal tax return to claim the Hope credit. In addition, the taxpayer must claim an eligible student as a dependent on the tax return, unless the credit is for the taxpayer or the taxpayer's spouse. (This means the eligible taxpayer may also be the eligible student.)

For more information refer to these IRS guides:

How Do You Get It?

To apply for the credit, taxpayers must report the amount of tuition and fees paid as well as the amount of certain scholarships, grants, and untaxed income used to pay the tuition and fees. Schools are required to send this information by January 31, in the form of a 1098-T statement to each taxpayer and to the IRS. Taxpayers use this information and their own records about tuition and fees paid when they fill out IRS form 8863 to claim the tax credit. The statement sent by the school will also include contact information for someone at the school who can answer questions about the information on the form. A taxpayer may wish to talk to a tax advisor for help in calculating the amount of the credit.